The Uncertainty Effect and the Window of Opportunity

 

Week of April 29th, 2024

Welcome to AI8’s weekly newsletter, your ultimate source for curated insights and updates from the dynamic world of venture capital!

We’ve scoured the vast landscape of the web to bring you a comprehensive roundup of the industry’s top news articles, all in one convenient place. We keep you ahead of the game and in the know about all things related to the vibrant world of investments

 

 

STARTUPS

 

ROUNDS AND UNICORNS

 

The Week’s Biggest Funding Rounds: Xaira And Other AI Startups Have Huge Week (Crunchbase, 5 minute read)

  1. Xaira Therapeutics (biotech): Secured over $1 billion from lead investors Arch Venture Partners and Foresite Capital, among others, for AI-driven drug discovery

  2. Augment (AI): AI coding assistance startup raised a $227 million Series B round, helping developers with AI-powered coding assistance

  3. Rippling (HR): HR startup closed a $200 million round led by Coatue, valuing the company at $13.5 billion, offering a workforce management platform

  4. Cognition (AI): AI coding assistant startup raised $175 million led by Founders Fund, developing AI-powered coding assistant called Devin

  5. Endeavor BioMedicines (biotech): Raised $132.5 million for idiopathic pulmonary fibrosis treatments

New Funds Target Out-Of-Favor Startup Sectors (Crunchbase, 5 minute read)

Several U.S. venture firms have raised new capital to invest in sectors that experienced significant funding declines. This includes industries like consumer products, apps, gaming, and cybersecurity. Despite the downturn, there's optimism as Q1 venture investment showed a modest uptick, suggesting some sectors may have reached a cyclical low and are poised for growth

  • Maven Ventures and Hack VC are investing in consumer behavior ($60 million) and Web3 ($150 million) respectively

  • Cybersecurity, after a low, is seeing increased funding and talk of potential exits, as such, Ballistic Ventures raised $360 million for a fund that will invest exclusively in cybersecurity

  • Despite this resurgence, AI remains a favored investment theme across various sectors

Global venture fundraising report for Q1 2024 (Venture Capital Journal, 15 minute read)

At just $15 billion, Q1’24 was the lowest quarterly figure since Q3 of 2017. If the freeze continues, the full year is on track to raise about $60 billion, which would be the lowest annual total since 2014, when venture funds worldwide collected about $59 billion

  • The average venture size plummeted to $106 million in Q1’24, the smallest figure since 2019 when the average fund came in at about $112 million

  • North America remained the most popular region, accounting for 52% of the total fundraising

  • In Q1’24, none of the largest funds that closed during the quarter was larger than $1 billion

 
 

Global M&A Report (Pitchbook, 20 minute read)

In 2023, global M&A experienced its second consecutive year of decline. However, historical trends suggest that M&A typically rebounds from such declines, and this year is expected to follow suit. Q1 2024 shows improvement compared to the same period in 2023, rising by approximately 5% to 10%

  • The recent quarters indicate a slow recovery in M&A activity. However, private equity (PE) buyers have been slow to engage due to high borrowing costs

  • The delay in central bank rate cuts has tempered the M&A recovery, particularly for financial sponsors

  • In terms of valuations, North America and Europe transaction multiples remained stable in Q1 2024. The median EV/EBITDA multiple for M&A transactions in Q1 2024 was 9.4x, unchanged from 2023, and the median EV/revenue multiple was 1.6x, also unchanged from 2023

 
 
 

INDUSTRY

 

As Americans Spend More Out Of Pocket On Healthcare, Startups See Opportunity (Crunchbase, 5 minute read)

Americans are spending increasingly more on healthcare out-of-pocket, surpassing $470 billion annually, driven by high-deductible health plans and providers not accepting insurance. While consumers are not pleased with this trend, startups and investors see scalable opportunities

  • Companies focusing on health savings account platforms, care price comparison apps, and tools for employers offering high deductible plans have received hundreds of millions in funding

  • The investment activity in this space is primarily early-stage, with potential for exponential growth given the significant sums involved

  • Key themes in this sector include access, price transparency, and alternative plans like Individual Coverage Health Reimbursement Arrangements (ICHRAs)

  • Startups are developing tools to make it easier to manage self-pay transactions, and find the best value for medical services

AI Funding Stays Strong Despite Few Billion-Dollar Rounds (Crunchbase, 4 minute read)

Venture funding for AI startups increased slightly to $12.2 billion across 1,166 deals, compared to the previous quarter. This is a 25% decrease from Q1 2023, which included a massive $10 billion round for OpenAI

  • Notable funding rounds in the first quarter included Moonshot AI raising over $1 billion, Figure raising $675 million, and MiniMax raising $600 million

  • Not all AI startups have been faring well, as evidenced by layoffs at companies like Stability AI and Tome, which could be indicative of challenges in securing funding

 

 

ECONOMIC SNAPSHOT

 

Manufacturing in Mexico is having its moment. The US is buying in — and so is China (CNN, 6 minute read)

Mexico has surpassed China as the top exporter to the US in 2023, driven by manufacturing, which comprises 40% of Mexico's economy. US imports from Mexico continued to increase, while Chinese exports to the US were down 20% in 2023. Nearshoring is becoming more popular for companies wanting to reduce reliance on US-China trade and avoid supply chain disruptions

  • Factors such as low labor costs, proximity to American markets, and the US-Mexico-Canada (USMCA) agreement make Mexico an attractive manufacturing destination

  • Mexican manufacturing's success in exports to the US has led to speculation that Chinese companies might be using Mexico to avoid US tariffs on Chinese goods

  • Both Biden and Trump have different approaches to growing domestic manufacturing, with Biden considering tripling tariffs on Chinese steel and Trump proposing a 60% tariff on Chinese goods

  • Investments in Mexico, such as Tesla's new plant in Monterrey, indicate confidence in Mexico as a manufacturing base

Joe Biden dealt blow as investors scale back bets on pre-election rate cut (Financial Times, 5 minute read)

Joe Biden's hopes for a pre-election rate cut were diminished as inflation and growth data led investors to push back expectations of a move by the Federal Reserve

  • This shift followed first-quarter inflation-adjusted growth figures below expectations and a jump in underlying inflation to 3.7%

  • Despite Biden's hopes for economic momentum, borrowing costs remain high

  • The first-quarter annualized growth rate of 1.6% was below expectations, with consumers spending less on certain goods but more on financial services and insurance

  • The stock market reacted negatively, with the S&P 500 down 1.1% and the Nasdaq Composite down 1.5%, while the 10-year US Treasury yield rose to 4.71%

Dollar a tad softer as markets wait for Fed (Investing, 4 minute read)

The Japanese yen surged against the dollar, rising as much as 5 yen from a 34-year low earlier in the day, amid speculation of yen-buying intervention by Japanese authorities, reportedly for the first time in 18 months

  • The dollar fell to 154.4 yen from an intraday high of 160.245, sparking speculation of Bank of Japan intervention, given that the yen had fallen more than 10% against the dollar this year

  • This move came amid a busy week for traders, with the U.S. Federal Reserve's policy meeting and the U.S. jobs report on the agenda

  • Meanwhile, the U.S. Federal Reserve is expected to maintain interest rates, contributing to the divergence in policy stances between the Fed and the Bank of Japan

Economic Growth Forecasts for G7 and BRICS Countries in 2024 (Visual Capitalist, 5 minute read)

The International Monetary Fund has released its real GDP growth forecasts for 2024, showing global growth remaining steady at 3.2%. However, major nations are seeing declining forecasts

  • Four G7 nations are set to grow faster than last year, which includes Germany making its comeback from its negative real GDP growth of -0.3% in 2023

  • Despite mostly lower growth forecasts in 2024 compared to 2023, BRICS nations (Brazil, Russia, India and China) still have a significantly higher average growth forecast at 3.6% compared to the G7 average of 1%

  • While the G7 countries’ combined GDP is around $15 trillion greater than the BRICS nations, with continued higher growth rates and the potential to add more members, BRICS looks likely to overtake the G7 in economic size within two decades

 
 
 

 

IMPACT & CLIMATE RESILIENCE

 

What Immigrants Bring To America (Forbes, 4 minute read)

Despite making up only 14% of the population, immigrants have founded over one-third of all new businesses and over half of startups valued over $1 billion in the US

  • While most Americans believe immigrants are beneficial to the country, there has been a recent decline in support for immigration due to concerns over illegal immigration

  • Stories of successful immigrants, such as Andrew Grove (former president and chairman of Intel), Jan Koum (co-founder and former CEO of WhatsApp), and Derrick Rossi (co-founder of the pharmaceutical company, Moderna), highlight the valuable contributions immigrants make to American society

 

 

IPO & EXITS

 

Healthy Returns: Biotech IPOs ramped up to start 2024, but the market hasn’t fully recovered just yet (CNBC, 6 minute read)

After a two-year dry spell, biotech IPOs showed signs of life in Q1 2024, reaching over $1.3 billion raised across nine companies, more than triple the amount from Q1 2023. However, recent IPOs have not traded well, leading to skepticism about the market's prospects for the rest of the year

  • Companies, like CG Oncology and Kyverna Therapeutics, raised substantial amounts, but others, like Metagenomi, experienced post-IPO struggles

  • While the biotech sector is not on pace to match previous strong years in terms of IPO numbers, factors such as potential rate cuts could positively influence IPO activity in the second half of the year

Rubrik IPO nails $1.44B win for Lightspeed (Pitchbook, 4 minute read)

Rubrik, a cybersecurity software company, experienced a 16% increase in its stock price on its first day of trading on Thursday 25th, valuing the company at $6.6 billion based on outstanding shares. This successful IPO is seen as a signal that the IPO window for venture-backed companies is reopening

  • Investor demand for Rubrik was strong, with orders exceeding available shares by 20 times

  • Lightspeed Venture Partners, which incubated Rubrik and led its Series A, held a 24% stake in the company at the time of IPO

  • Despite reporting a net loss of $354 million in the last fiscal year, the company's annual recurring revenue from subscriptions grew by 47% in 2023

  • Rubrik's IPO will test public investors' appetite for high-growth venture-backed companies that are not yet profitable

The Uncertainty Effect: Why IPOs May Be on Hold Until Post-Election (Inc, 5 minute read)

The IPO market this year has been marked by uncertainty, including concerns about interest rates, international conflicts and the upcoming U.S. presidential election. Historically, elections have caused modest and short-lived fluctuations in IPO volume, with October typically seeing a jump in IPOs and November seeing a decrease

  • While past elections have caused modest fluctuations in IPO volume, the overall impact on most IPOs has been minimal over the past two decades

  • The IPO market has been recovering steadily from 2023, with 59 companies going public in the U.S. so far in 2024, compared to 154 companies in the previous year

  • Overall, while uncertainty persists, historical trends suggest that the period after Labor Day weekend could see a surge in new IPO activity

 

 

AI8 VENTURES HIGHLIGHT

 

AlphaInsights: Venture Capital Report 2023

Alpha Impact 8 Ventures is thrilled to share our latest insights into the dynamic world of investments with our 2023 Venture Capital Report, here’s an updated version with 2024 commentary that dives into the ever-evolving landscape of financial markets.

Just a few months ago, Michael Burry, the legendary fund manager who famously profited from shorting the US housing market in 2008, bet more than $1.6 billion on a Wall Street crash by shorting the S&P 500 and Nasdaq-100. Warren Buffett’s money pile reached record highs of $157 billion as Berkshire Hathaway disposed of a net $33 billion of stocks over the past three quarters. Is there something Buffett and Burry know that the rest of us don’t?

 
 

 

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Happy reading,

AI8 Ventures’ Research & Investment Team

 
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